Get The Answers: Buying a business? Ask what your involvement will be

David Newport. Photo / Supplied

It's a fallacy that businesses can run with no owner participation, says David Newport, director of Switch Business.

Buying a business is something people do for a variety of reasons. It is never a step to be taken lightly. Doing your due diligence is just the beginning of this intricate process.

Some people buy businesses to buy themselves employment. How does that work?

In simplistic terms, SMEs are either owner-operator businesses, or businesses with a management structure that can include the owner.

The term "buying yourself a job" comes from the purchase of an owner/operator business in which - in most cases - the owner provides the majority of the functions of the business. Often it becomes the owner's lifestyle, and such owners find it difficult to separate themselves for time off.

The term also becomes more prevalent in tough economic times. Someone who has been made redundant may look to gain income security by buying a small business - but in many cases, the income generated is no better than the average wage.

If you are buying a business as an investment, what sort of questions should you ask yourself?

Ask what involvement you see yourself having in the business. It is a fallacy to think you can buy a business and it can run under management with no owner involvement. Any business will operate more successfully when an owner is present. This doesn't mean full-time, but you have to identify what involvement it requires and then ask whether you have that time available.

We regularly sell businesses to owners who have multiple operations that are running successfully with their limited involvement, and they often target business types that are suitable for managers they trust who are looking for opportunities.

The term "investment" implies a return on investment, so you would need to complete your due diligence on the business in question to ascertain whether the business can offer that return now and into the future.

What impact can it have on a business to have a new owner?

The transition to a new owner can be a traumatic experience for all involved if it is not planned properly. The most identifiable issues are staff morale, client/supplier confidence, competitors and the extraction of "the goodwill of the business" from the former owner's experience. Nobody likes change, so set in place a plan which shows all staff, clients, suppliers and competitors it is business as usual.

It is a mistake to think you don't need the outgoing owner to complete his/her "vendor's period of assistance" agreed on in the sale and purchase agreement.

Having the owner available to help you through this period is like having your mother's help when you come home with your first baby. We often see new owners wanting to stamp their authority on the business and mistakenly think it would be a distraction to have the former owner around. You can't learn less, so you should milk the former owner for all of their experience.

What can you do to make the staff feel secure and want to do their best for you?

People want to be appreciated and have job security, especially in these tough economic times. So first, tell them they are valued and their employment is secure (if it is). After that, because they have more experience in the business than you, seek their involvement in planning how to improve the business.